Atso Andersén ESSAYS ON STOCK EXCHANGE COMPETITION AND PRICING

158 Pages·2005·0.81 MB·English

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ISSN 1237-556X A HELSINKI SCHOOL OF ECONOMICS
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2
ISBN 951-791-917-4 5
2
2005 ACTA UNIVERSITATIS OECONOMICAE HELSINGIENSIS
A-252
Atso Andersén
ESSAYS ON STOCK EXCHANGE
COMPETITION AND PRICING
HELSINKI SCHOOL OF ECONOMICS
ACTA UNIVERSITATIS OECONOMICAE HELSINGIENSIS
A-252
© Atso Andersén and
Helsinki School of Economics
ISSN 1237-556X
ISBN 951-791-917-4
ISBN 951-791-918-2 (Electronic dissertation)
Helsinki School of Economics -
HeSE print 2005
Abstract
This study deals with the industrial structure, the nature of competition and the pricing
of stock exchange trading services in Europe. Specific for the study is that exchanges
are considered to be profit-maximizing institutions that face competition.
A conventional analysis of concentration ratios shows that the concentration of
European stock exchanges is low. When the nature of competition is measured in more
detail, regression results indicate that exchanges operate in monopolistic or perfect
competition at the European level.
Pricing of stock exchange matching services under network externalities is studied in a
three-layered spatial model. The model presents a monopoly exchange and interaction
between two brokers providing trading services to investors in an uncovered market. A
case for investor-level network externalities is examined. Three different vertical
industry structures were analyzed: no collusion, collusion between brokers, and
vertically integrated industry. It was found that the vertically integrated structure results
in the lowest fees and the highest demand as well as in the highest profits for brokers.
Finally, the empirical determination of the optimal pricing of share trading services is
studied. In particular, optimal price schedule is determined for the Helsinki stock
exchange. The estimation results indicate that the market level demand for trading
services is elastic. Moreover, the fee structure of Helsinki stock exchange is found to be
multidimensional compared with other stock exchanges.
Keywords: stock exchange competition, network externalities, nonlinear pricing,
trading services, Europe
JEL classification: D43;L13;G29

Foreword
I wish to thank my adviser, Professor Pekka Ilmakunnas, who has patiently commented
my dissertation from its initial phase. I am also grateful to official examiners Docent
Ville Aalto-Setälä and Professor Otto Toivanen for their insightful comments and
suggestions.

Moreover, I want to thank Professor Juuso Välimäki, Professor Pertti Haaparanta,
Professor Klaus Kultti, Dr. Ari Hyytinen and Dr. Juha Tarkka for discussions,
encouragement and other contributions. I am unable to mention all the persons that
have helped me during the research project. However, I want to express my thanks to
Ms. Liisa Jauri, Mr. Jouni Torasvirta and other personnel of the Helsinki exchanges for
contributing to my project. My special thanks go to Sami Yläoutinen for sharing the
wins and set-backs over the course of the post-graduate studies and to Arto
Hakkarainen of HSE for advicing me in administering my work. Finally, I would like to
thank all the participants of FPPE seminars on Industrial Organization and Capital and
Financial Markets during 2002-2003 and the HSE seminar in spring 2003 for their
comments.

I am indebted to the Alfred Kordelin Foundation and HSE Centre for Doctoral Studies
for enabling this project. I also wish to thank Yrjö Jahnsson Foundation, Research
Foundation of Savings Banks, The Finnish Foundation for Advancement of Securities
Markets, The Finnish Foundation for Economic and Technology Sciences – KAUTE,
HSE Foundation and the Research Foundation of Co-operative Banks for financial
support.

It was an adventure of research. This study is dedicated to my dear family Johanna,
Reko and Tore.

Espoo, 8th of April, 2005

Atso Andersén

Author Atso Andersén
Helsinki School of Economics
Department of Economics
P.O. Box 1210, 00101 Helsinki, Finland
[email protected]
Title Essays on Stock Exchange Competition and Pricing

Supervisor Pekka Ilmakunnas
Professor
Preliminary Ville Aalto-Setälä
Examiners Docent, Research Director
Turku School of Economics, Pori Unit

Otto Toivanen
Professor, Director
Helsinki Center of Economic Research
Chairperson Pekka Ilmakunnas
(Custos), Professor
Dissertation Helsinki School of Economics
Proceedings
Opponent, Ville Aalto-Setälä
Docent, Research Director
Turku School of Economics, Pori Unit

Type of Based on essays
Research

Essays Atso Andersén, “Competition Between European Stock
Exchanges”, HSE Working Paper W-342, 2003.

Atso Andersén, “Pricing of Stock Exchange Trading – The Role of
Network Externalities”, Unpublished.

Atso Andersén, “Assessing Demand for and Pricing of Stock
Exchange Trading Services”, Unpublished.

Table of Contents
ABSTRACT....................................................................................................................3
FOREWORD..................................................................................................................5
INTRODUCTION.........................................................................................................13
1 COMPETITION? - STOCK EXCHANGES ARE MONOPOLIES, AREN’T THEY?.........15
2 THE INCREASING ROLE OF FINANCIAL MARKETS................................................16
3 OVERVIEW ON STOCK EXCHANGE COMPETITION AND PRICING LITERATURE.....23
3.1 Identifying the nature of stock exchange competition.......................24
3.2 Network externalities involved in trading services.............................27
3.3 Pricing stock exchange trading.............................................................28
4 MOTIVATION FOR THE THESIS............................................................................30
5 OUTLINE OF THE THESIS....................................................................................31
5.1 The first essay: Competition between European Stock Exchanges32
5.2 The second essay: Pricing of Stock Exchange Trading – The role
of network externalities.......................................................................................33
5.3 The third essay: Assessing demand for and pricing of stock
exchange trading services.................................................................................35
ESSAY I: COMPETITION BETWEEN EUROPEAN STOCK EXCHANGES....43
1 INTRODUCTION...................................................................................................46
2 THE INDUSTRIAL STRUCTURE OF EUROPEAN STOCK EXCHANGES..................47
2.1 Income structures....................................................................................50
2.2 Vertical structure of the share trading services industry...................54
2.3 Institutional factors in stock exchange competition...........................55
2.4 Is there one European stock market, after all?...................................59
3 A THEORETICAL FRAMEWORK FOR MEASURING THE LEVEL OF COMPETITION..61
3.1 A specification of the empirical model................................................64
4 EMPIRICAL ESTIMATION RESULTS......................................................................67
4.1 Data...........................................................................................................67
4.2 The exchange industry estimations......................................................68
5 CONCLUDING REMARKS.....................................................................................71
REFERENCES............................................................................................................73
APPENDIX 1 PRICE SCHEDULES FOR MATCHING SERVICES IN
EUROPEAN EXCHANGES 2002.............................................................................76
ESSAY II: PRICING OF STOCK EXCHANGE TRADING – THE ROLE OF
NETWORK EXTERNALITIES...................................................................................79
1 INTRODUCTION...................................................................................................82
2 THE MODEL.........................................................................................................85
2.1 The industry set-up.................................................................................86
2.2 Investors...................................................................................................87
2.3 Brokers and the exchange.....................................................................89
3 FEES UNDER INVESTORS’ NETWORK EXTERNALITY...........................................90
3.1 Brokers’ collusion....................................................................................94
3.2 Joint profit maximization.........................................................................97
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